After a strong first quarter, global stock markets gave us increased volatility during the second quarter before finishing the quarter with solid gains. Stocks were strong in April, suffered a large sell off in May, and rebounded once again in June. Bonds were much more stable, following up a good first quarter with more gains during the second quarter. Mixed economic data and heightened trade fears left investors unsure of where the economy is headed, which increased volatility.
We talked in our last letter about the yield curve inverting briefly during the first quarter and the possible implications of this. The yield curve inverted again in late May and remains inverted to this day. This happens when yields on short term bonds are higher that they are on longer term bonds. This rarely happens and is often the signal that an economic recession is looming. In fact, the last seven recessions in the U.S. have been preceded by an inverted yield curve. It is worth noting that the bond market is much better at predicting the economic future than the stock market is. There is an old adage on Wall Street that is worth remembering: Never ignore an inverted yield curve.
The stock market in the U.S. began its current bull market run in March of 2009, and has risen over 400% since then. Since September of 2010, the U.S. economy has produced almost 21 million new jobs. It has been a great ten year run. How much longer this expansion has to run is difficult to forecast. As we discussed earlier in this letter, the bond market is predicting economic headwinds. Also concerning is the valuation of the stock market. A measure of valuation often used by Warren Buffet measures the total value of the stock market against the overall size of the economy. This measure has never been higher than it is currently.
Most of the money we invest for our clients will ultimately be used to provide retirement income. A sad reality is that almost one half of the Baby Boomers in the U.S. have no retirement savings and will live on Social Security alone. You may not know the name Ida May Fuller, but she holds an interesting spot in American retirement history. Miss Fuller was the first ever recipient of monthly Social Security benefits, beginning back in January of 1940. She paid payroll taxes for three years before she retired, paying a total of $24.75. She received a monthly benefit for thirty five years until she died in 1975 at the age of 100. She received $925 of benefits for every dollar she paid in payroll taxes. It’s always good to be first.
The current investment room is occupied by two elephants: High stock valuations and the inverted yield curve. While bond yields can adjust quickly, high valuations are not going anywhere until there is a price adjustment. We remain cautious with our outlook for the remainder of this year.